Sunday, March 7, 2010

CRASH OF THE EURO

The extreme deficit spending by Portugal, Ireland, Greece, and Spain (PIGS) may be the end of the Euro, the currency in Europe. For much of the past decade the European Union (EU) was strengthening their federation and the Euro was poised to overtake the US dollar as the world’s new global currency. The Euro, like the US dollar, is one of the few market-driven, massive-value, currencies in the world (many of the world’s currencies are pegged to the value of US dollar or Euro). Now economically stable countries in the EU, like Germany, may not be willing or able to stabilize the Euro’s sinking value resulting in a massive selloff of Euros and a crash in its foriegn exchange value.

Though the crisis seems to be caused by Greece’s deficit spending and accumulated debts, it is far worse. The real crisis is one of the credibility of the EU’s financial system. It turns out that Greece has been fudging its budget numbers for years and now with a new Administration in power, the extent of their past deceptions are being revealed. This deception creates a trust issue that goes far beyond a deficit problem. California has a huge deficit and massive debt, but it is known and exposed for all to see. How did the EU miss Greece’s fudged accounting and how many other countries in the EU are using the same accounting practices? As French President Nicolas Sarkozy promises solidarity with Greece and threatens to fight speculators daring to bet on the Euro’s demise, global Euro holders must ask themselves what is the true value and future viability of this currency?

Greek leaders are out campaigning for low interest loans in Europe and on Tuesday will ask President Obama for help from the US to scrape together enough money to pay off their growing debts. Spain and Portugal are rumored to have even larger debt problems than Greece, but like Greece, the true picture is really unknown. Germany, the fourth largest economy in the world may be motivated to return to their own currency to isolate their economy from the demise of the other countries and collapse of the European Central Bank.

A surge in the value of the dollar means US products will be more expensive in Europe. European tourists will find it harder to pay for vacations to the US and Hawaii. The upside for Americans is that Europe may once again be affordable.